What is FINNIFTY?
Nifty Financial Services Index, also known as FINNIFTY, was launched by NSE on September 7, 2011. It comprises of 20 stocks which include banks, financial institutions, housing finance companies, insurance companies, and other financial services companies. The FINNIFTY tracks the performance of these companies, and the weight of each stock depends on the free float capitalization value in the market.
Financial companies are essential for the success and survival of the economy, especially in countries like India, where the economy is continuously undergoing changes. Banks provide borrowers with money lent from surplus savings. At the same time, NBFCs and Housing Finance Companies (HFCs) promote credit creation and overall economic growth. Therefore, the behaviour of this index depends on the performance of underlying sectors within the economy. In other words, FINNIFTY symbolizes Nifty Financial Services.
The FINNIFTY index is constructed based on the free float market capitalization methodology. Nifty 50 also follows the same methodology. Also, the weightage rebalancing happens every six months – on January 31 and July 31.
The base date for FINNIFTY is January 1, 2004, and the base value for the index is 1000. Moreover, the companies shall be a part of the Nifty 500 to be eligible for FINNIFTY.
No single stock will have a weightage of more than 33%, because the weightage of each stock is on the basis on free-float market capitalization. Also, the weightage of the top three stocks cumulatively should not be over 62% when the rebalancing occurs.
What are the Sectors Involved in FINNIFTY?
The following are sectors and their weightage involved in FINNIFTY.
|Housing Finance Firms||18.5%|
|Other Financial Services||1.3%|
|Total Financial Service Exposure||100%|
Uses of the Nifty Financial Services Index
The following are the major uses of the Nifty Financial Index (FINNIFTY) –
- Benchmark: This index is popularly used by investors as a benchmark. Earlier, a stock performance was compared with the Nifty 50 or BSE Sensex. But now investors can compare their finance sector stocks with this specialized financial sector benchmark index.
- Hedging Against Individual Stocks: Some professional investors like to purchase all stocks as they appear on the index in a similar weightage. However, FINNIFTY places the heavy-weighted stock first, and the weight decreases as they move down.
- Mutual Funds: Investors can prefer to put their money in mutual funds that track these stocks in the index. Some of the mutual fund schemes comprising of FINNIFTY stocks are Invesco India Financial Services Fund, ABSL Banking and Financial Services fund, and Sundaram Financial Services and Opportunities Fund. Therefore, investors who avoid investing directly can invest via mutual funds.
- Futures & Options: Investors can also choose stocks from the FINNIFTY index and trade in futures and options for such stocks. The fee and the expiry date will be mentioned in the derivative contract. However, it can be a risky alternative for investors who are not experienced, as they can quickly lose money.
How to Invest in the FINNIFTY Index?
This market index cannot be purchased directly, like company shares. However, there are multiple ways through which one can invest in the index as follows –
FINNIFTY Vs Bank NIFTY: Key Differences
The following are the differences between FINNIFTY Vs Bank NIFTY.
|Sector Composition||Banking, financial institution, NBFC, HFC, and Insurance companies||Only banking sector|
|No. of stocks||20||12|
|Correlation with Nifty 50 index||94% and Beta is 1.2||98%|
Financial Services Sector
- 5 out of 20 stocks of the FINNIFTY index are constituents stocks of Bank Nifty and account for 63.89% weightage in the FINNIFTY index and 87.48% weightage in Bank Nifty.
- The financial sector is the largest among the listed companies, accounting for 33.5% of the Nifty 500 index.
- The financial industry accounts for 35% of the foreign portfolio investments (FPIs) assets under management (AUM).
- 48% of FPI’s net inflows are invested in the financial services sectors, as per recent reports.
- In the last few years, there have been big IPOs in the financial services sector, and a few big companies are still in the process of getting listed.
- Most Asset Management Companies (AMCs) have schemes related to the financial services sector.
- Therefore, the Nifty Financial Services Sector is a complete package of the Indian Financial sector that includes banks and other financial companies.
Mutual Fund Schemes Investing in Banking and Financial Sector
- HDFC Banking & Financial Services Fund
- Tata Banking & Financial Services Fund
- SBI Banking & Financial Services fund
- Aditya Birla Sun Life Banking & Financial Services fund
- Baroda BNP Paribas Banking and Financial Services Fund
Frequently Asked Questions
The FINNIFTY derivatives are settled in cash, and the expiry is the last Thursday of the month of expiry for the monthly contract. For weekly contracts, the day of expiry is Thursday.
The National Stock Exchange (NSE) provides options and futures in seven weekly and three monthly serial contracts. Also, NSE is offering weekly futures for stock derivatives for the first time.
The significant advantage of investing in FINNIFTY is it helps to reduce the non-systematic risk involved in investment. The non-systematic risk refers to declining revenues, strikes, rise in financing cost, narrowing profit margins, drop in sales, natural disasters, etc. Besides this, unsystematic risks refer to business risks and financial risks. By investing in different companies, investors can diversify their risk. Therefore, FINNIFTY comprises of top leading companies in the financial industry to help to diversify the unsystematic risks and also gives a chance to invest in top financial companies with maximum market capitalization.
It invests in 20 stocks, and Some of the top stocks that FINNIFTY invests in are HDFC Bank, HDFC Housing Finance, ICICI Bank, Kotak Bank, Axis Bank, Bajaj Finance, SBI, Bajaj Finserv, HDFC Insurance, Shriram Transport Finance and many more.
The major difference between FINNIFTY and Nifty 50 is the number of stocks in the index. Also, ten FINNIFTY companies are a part of the NIFTY 50 list which accounts for less than 40% of weightage in NIFTY 50. Also, the volatility is higher in the FINNIFTY index due to exposure limited only to the financial sector, whereas NIFTY 50 is a broad market-based index. Lastly, the risk-to-reward ratio for FINNIFTY is 0.64 and for NIFTY 50 is 0.61.